Don’t miss the latest Jeffrey Gundlach interview in Barron’s. It is a good in-depth look into how the money manager thinks about investing. At the end of the article, you get the distinct feeling he believes almost all asset classes are overvalued. Let me make a few comments about what he says.
Was the subprime-mortgage crisis unique?
Gundlach is known as a subprime crisis clairvoyant. He called subprime a “total unmitigated disaster” and predicted a severe economic downturn. Now, when I look at subprime, I think of how the expansion and restriction of credit flows through to the real economy. What I am looking at is the second part of Gundlach’s prediction, the downturn and its severity.
Gundlach was asked about that in the context of what he sees as a mania in cryptocurrency. “But unlike the misbegotten securitization of subprime mortgages, cryptomania doesn’t pose a threat to the financial system.” His answer was equivocal on the economy. He focused on the market.
That’s true, but bitcoin has been important in framing the speculative mood of today’s financial system…
Bitcoin’s price then quadrupled over a three-month period to around $19,500, before falling to $7,800. Believers called it a healthy correction. The stock market hung in for most of that time, but topped on Jan. 26, 2018, and subsequently fell 12%. As stocks started falling, bitcoin was rallying again. It is almost as though bitcoin has been leading the equity market.
Another mania of sorts has involved shorting volatility through the sale of futures on the VIX [Cboe Volatility Index]. This trade went bad when stocks corrected in February and volatility spiked. Derivatives blow-ups usually precede a major turning point in the stock market. Long-Term Capital Management blew up in September 1998.
The implication: It may be hard to tell what market signals indicate systemic risk. Instead, Gundlach looks for signs of excess, of mania. He draws a parallel between the short volatility trade and the trades which sunk Long-Term Capital Management in 1998. And the latter trades almost caused a financial crisis. So the implication is that the short volatility trades could do as well. Then again, so could bitcoin, he infers, when he calls it important in “framing the speculative mood”.
Gundlach: Is the Fed data-dependent
The sense I got from Gundlach is that he believes the Fed’s regime shift has less to do with the data than it claims. “The Federal Reserve has moved into tightening mode. In fact, it has returned to autopilot. The Fed previously had pledged that monetary policy would depend on the strength of economic data.”
Did you catch that? “It has returned to autopilot”. That sounds like a Fed which Gundlach believes is hellbent on rate increases come what may. Let’s see what Jay Powell has to say at 14:30 EST today. My write-up for that is here.
Ominously, Gundlach shifts to markets from talking about the Fed with this:
I have been thinking a lot about cycles. I turned bearish on stocks in the fourth quarter of 1999 because the market seemed gripped by mania. The Nasdaq rose another 25%, but within a year it was more than 50% lower. I turned bearish on housing in 2006; it took another year for the crash to come, but it came.
My read: Gundlach thinks this regime shift could end very badly.
Stocks and Bonds
His immediate call for stocks is less draconian. He expects the market to close down for the year. And while we could eventually see a major bear market in stocks, it’s bonds where he is predicting immediate pain. The 30-year bond yield above 3.22% is sort of a red line for him that means a new bear market.
If the 30-year breaks above 3.22%, we’ll be in a rising yield trend from any traditional charting perspective. The 30-year has been trading in a narrow yield range, of between 3.08% and 3.22%. This isn’t going to last; the trend will break.
Lots to think about. Hit up the link below for the full story.
Source: What Is Jeffrey Gundlach Worried About Now? – Barron’s